Gold continues to drift sideways above $1800; analysts and investors eye, debate Fed’s next move

(USAGOLD – 7/16/2020) – Gold continued to drift sideways in territory claimed above the $1800 mark last week.  It is down $1 this morning at $1810.  Silver is down 16¢ at $19.36. Topping the list of investor concerns is how the Fed is likely to react in the future to the resurgence of pandemic cases, growing unemployment, and the possibility of either runaway inflation or a deflationary depression. Some analysts say the Fed should wait and see. Others say it should step on the accelerator.  Few say it should jam on the brakes. “Yesterday,” reports Saxo Bank’s Ole Hansen in his regular client advisory. “Federal Reserve Governor Lael Brainard, an influential ‘dove’ on the Fed’s board, warned that the U.S. economy appears to be slowing. While the Fed would need to carry out more analysis, she gave a strong signal that yield-curve control was coming. Some of the major moves in gold during the past decade often started with developments in the bond market.”

Chart[s] of the Day

bar chart showing excess reserves growth in 2020Source:  Federal Reserve Bank of St. Louis

line chart showing growth in money supply 2020Source:  Federal Reserve Bank of St. Louis

overlay line chart showing mzm, gold tracking July 2020Source:  Federal Reserve Bank of St. Louis, ICE Benchmark Administration (IBA)

Chart note:  During the financial crisis that began in 2008, the Fed sterilized its money creation by routing money back to its coffers in the form of commercial bank excess reserves – a strategy that kept the inflation rate from running out of control. As you can see in the first chart, the current level of sterilization, at least in the short term, is greater than what occurred in the 2008-2014 period. At the same time, as you can see in the second chart, the rapid growth in the money supply this time around goes beyond anything that occurred during the prior crisis. Whether or not the growth in the money supply will translate to price inflation down the road remains to be seen. (Please take note that the growth in the money supply began roughly a year ago – well before the onslaught of the coronavirus pandemic.) As you can see in our third chart, gold has tracked MZM higher.

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